Normal costing

Normal costing records actual direct materials and direct labour for each job but applies manufacturing overhead at a rate set before the period begins.

ByHoang TruongUpdated June 30, 2026

FrameworkNormal costing

See it move

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The infographic is a stacked-bar diagram that builds the cost of a single job from three layers: actual direct materials of €2,400, actual direct labour of €850, and applied overhead of €440, giving a job total of €3,690. The applied overhead is computed as 22 machine-hours at the predetermined rate of €20 per machine-hour, allowing the job cost to be known as soon as work is complete, without waiting for actual overhead figures.

Where it fits

SubjectCost AccountingAdvancedTopicJob & Process CostingAdvanced

The formula

LaTeX

POHR = \frac{OH_{budget}}{A_{budget}}

Variables

$P O H R$: Predetermined overhead rate (€ per activity unit)
$O H_{b} u d g e t$: Budgeted total manufacturing overhead for the period (€)
$A_{b} u d g e t$: Budgeted activity base (e.g. machine-hours or direct labour-hours) (activity units)

The rate is set before the period begins so overhead can be attached to jobs as they are completed.

LaTeX

JC = DM_{act} + DL_{act} + POHR \times A_{act}

Variables

$J C$: Total job cost under normal costing (€)
$D M_{a} c t$: Actual direct materials cost for the job (€)
$D L_{a} c t$: Actual direct labour cost for the job (€)
$P O H R$: Predetermined overhead rate (€ per activity unit)
$A_{a} c t$: Actual activity units consumed by the job (activity units)

Normal costing uses actual inputs for direct costs and an estimated rate for overhead, avoiding the wait for period-end overhead totals.

Check yourself

PracticeCORE

Under normal costing, which combination of inputs correctly describes how a completed job's total cost is determined?

Select an answer to check your understanding.